Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Friday April 1, 2022. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

March Madness And Steady Course

If you have paid any attention to financial markets these days, you should have felt its ‘March madness’: a month that saw S&P 500 corrected more than 12% since the beginning of the year and now it has started to recover rapidly: 

SPY (S&P 500 index ETF) has recovered almost 10% from its March 8th low. 

This all happened amid a crazy war between Russia and Ukraine and one of the highest inflation numbers since 1980s. 

We’ll discuss markets in some more details shortly after we look at one of our most volatile portfolios. 

Industry level momentum portfolios — highly volatile but high returns

Perhaps it’s a good time to look at our momentum portfolios that are based on industry level funds. Their recent roller coaster ride is certainly thrilling if not frightening: 

Portfolio Performance Comparison (as of 3/25/2022):
Ticker/Portfolio Name 3 Yr Max Drawdown Max Drawdown since 2001 YTD Return 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 1/2001
P Composite Momentum Scoring Fidelity Select Funds 24% 44% 6.3% 21.3% 16.8% 16.2% 15.8% 19.1%
P Composite Momentum Scoring Industries ETFs 47% 47% 10.3% 20.5% 25.4% 23.0% 17.8% 16.3%
VFINX (Vanguard 500 Index Investor) 37% 56% -4.4% 19.4% 16.1% 14.6% 10.1% 8.1%

3 Year Chart: 

Detailed comparison link >>

You can find P Composite Momentum Scoring Fidelity Select Funds on our Advanced Strategies page. It’s a popular portfolio followed by many expert-level subscribers.

Let’s look at a few stats: 

  • The momentum portfolios experienced some of largest maximum drawdowns since their start date in 2001. The Fidelity select fund portfolio did better, ‘only’ dropped 24% since its last all time high made in February 2021! However, the ETF portfolio P Composite Momentum Scoring Industries ETFs had the largest drawdown (47%) in its history, again from its latest high in February 2021. In fact, because of its large drop, we decided to remove its listing on Advanced Strategies page as we are concerned that it might not suitable to new subscribers. 
  • Both portfolios have had positive returns this year (6.3% and 10.3%), compared with -4.4% loss from S&P 500 index fund VFINX. 
  • Both portfolios have more than doubled annualized returns since 2001, compared with VFINX. 100 US dollars initially invested on 1/1/2001 would have returned as the follows:

The main reason we brought these portfolios up is not to brag about their good long term returns (in fact, both of them are far from their all time highs), but instead to address several subscribers’ concerns at a time when they experienced large loss. What we can learned from these portfolios are

  1. One needs to be prepared for (high) volatility of a portfolio. High volatility is the nature of financial investments. Simply put, it’s critical to understand what you are getting into. For example, we have pointed out many times that the industry level portfolios are highly volatile and these are not just some abstract words or numbers, Their recent behavior is a very good reminder to this. 
  2. In addition, one should have a high confidence in the nature of the strategies behind a portfolio. The strategies need to exhibit strong intuition and have long history of data backing. In this case, we know that momentum driven or trend following strategies have been around for quite some time and have been widely practiced. 
  3. The above two points are essential: if you don’t have a strong sense of understanding, it’ll be very likely that you might start to doubt and bail out of such portfolios, probably at the worst time when they are doing badly. If you don’t feel comfortable with the them, you should not pursue or follow such a portfolio. 

Finally, we would like to ask our readers to let the above words sink in your mind: they are again not some abstract words. It’s almost a sure thing that your portfolios will encounter such periods in some future times. So it’d better for you to really simulate/imagine through those lows before committing your hard earned money to them.

Market Overview

Other than a short burst of stock recoveries, major negatives are everwhere: 

  • The Russian-Ukraine war — it has lasted more than one month and there is no end in sight (though many think that markets might have priced in a not so bad outcome).
  • The high inflation — with the war and some partial shutdown from China, the supply limit induced inflation is lasting longer and again no one can say for certain when it’ll end. 
  • As a result, based on Factset, the number of companies in S&P 500 that have issued negative quarterly earnings guidance is the highest since 2019. This might even get worse if inflation and the war persist longer. 

  • We are seeing some alarming Treasury bond yield curves inverted: as the most import 10 year and 2 year Treasury bond yield spread is sitting around 0.07%, on the edge of reaching to 0,  and all other pairs including 10yr3yr, 10yr5yr, 10yr7yr and 30yr5yr are all negative, it’s very likely the US economy will enter a recession within one to two years. 
  • Finally, we are also seeing from the first chart in this article that year to date, total bond index has lost more than stocks. So both major assets: stocks and bonds are all negative at the moment, a very tough spot for investors. 

However how negative the above might seem to be, we remind our readers that markets can still surprise many. Though we have been negative with the current market valuations (both bonds and stocks) for quite some time, we admit that we don’t possess any better skills than an average investor to predict near term outcomes. All we can do is to advocate a practice that sticks to some well planned and sound strategies and navigate and respond accordingly as situations unfold: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation has dropped somewhat. However, it is still very high by historical standard. For the moment, we believe it’s prudent to be extra cautious. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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